UPDATE 2-Euro zone lending falls for 8th month

* Data shows c.bank funds not getting to firms, consumers

* M3 annual growth rate in Dec 3.3 pct vs 3.8 pct in Nov

* Loans to firms -22 bln euros m/m, to households -3 bln

FRANKFURT, Jan 28 Loans to companies and
households in the euro zone contracted for the eighth month
running in December, showing low official borrowing costs are
having little success in reviving investment and spending.

The European Central Bank has cut interest rates to a record
low and pumped more than 1 trillion euros into the banking
sector, which some banks are beginning to repay early in a sign
that funding conditions are improving. But lending remains weak.

Loans to the private sector fell 0.7 percent from the same
month a year ago, ECB data showed, in line with the mid-range
forecast in a Reuters poll of economists.

"The euro zone may be heading for a recovery, but not a
credit-fuelled one," said Berenberg economist Christian Schulz.
"Returning confidence in the banking sector may be concealed by
the effects of the ongoing recession and deleveraging."

The monthly flow of loans to non-financial firms fell 22
billion euros in December after falling by 7 billion euros in
November. The monthly flow of loans to households showed a drop
of 3 billion euros after a rise of 6 billion euros in the
previous month.

The cheap funds the ECB is pumping through the monetary
system are not reaching households and businesses evenly across
the currency bloc as some countries struggle to get their
stricken economies back on track, though progress has been made.

On a country-by-country basis, the data showed a 22 billion
euro drop in private-sector lending in Spain, the largest
monthly fall since July. In Portugal, private-sector lending
fell by 2.6 billion, the biggest drop in a year.

The central bank has taken some of the heat out of the euro
zone crisis by announcing a new, as yet unused, bond-purchase
programme, but the bloc's economy remains weak and is expected
to have shrunk in the final months of 2012.

ECB President Mario Draghi noted in early January some
economic indicators had stabilised at low levels and financial
markets' confidence had improved, which along with the ECB's
accommodative policy should lead to a recovery later this year.

Draghi even spoke of "positive contagion" in financial
markets, and Monday's data pointed in that direction, showing
consumers and firms' deposits in banks in Greece, Italy and to
some extent Spain rising in December.

The more upbeat assessment has doused hopes of any further
cuts in interest rates but most economists think the economy
will contract overall this year.

"The much more positive sentiment about the euro zone future
that has prevailed in financial markets so far this year will
probably take some time to materialise in greater credit
availability and economic growth," Oxford Economics' Marie Diron
said.

Euro zone M3 money supply - a more general measure of cash
in the economy - slowed to annual growth of 3.3 percent in
December from 3.8 percent in November, just below the consensus
of 3.9 percent from analysts polled by Reuters.

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